Location, tax rates can have big impact on contract's value

 
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PostPosted: Sat Jul 15, 2017 9:16 am    Post subject: Location, tax rates can have big impact on contract's value

http://nba.nbcsports.com/2017/07/15/location-tax-rates-can-have-big-impact-on-contracts-value/

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Location, tax rates can have big impact on contract’s value



With the mind-boggling money being doled out in NBA contracts, players don’t seem to be overly concerned about state taxes – or the lack of them.

Stephen Curry signed a $201 million deal with Golden State and Blake Griffin got a $175 million from the Los Angeles Clippers. The rub: In California, the top tax rate of 13.3 percent is the highest in the nation. To get just a rough indication of how much state tax they might face, consider that 13.3 percent of $201 million is about $26.7 million.

Meanwhile, Houston Rockets guard James Harden signed a $228 million extension to play in Texas, which has no state income tax.

Players are keenly aware of the differences, but it’s just one of many factors in their decisions.

How big a factor, it depends on the player and situation.

“It’s a consideration” for players, said Sean Packard, the tax director for Octagon Financial Services. “It’s not always the be-all and end-all, but it’s definitely something agents look at and that players look at.”

But when it comes to the IRS, the dollars connected to a player’s contract don’t tell the whole story about how much he’s going to be making. Where a player chooses to play – for instance the Boston Celtics or the Miami Heat – could go a long way in determining how much money he ends up receiving.

Players realize they could make more accepting a deal for less money from a team located where there are no state taxes than by signing with a team offering more money but located where there are state taxes.

“You’ve got to remember the best gross contract might not be the best net contract,” said Robert Raiola, who includes many professional athletes among his clients in his role as director of sports and entertainment for the PKF O’Connor Davies accounting firm.

Raiola cites former Utah Jazz forward Gordon Hayward‘s recent deal with the Celtics as an example. Boston and the Miami Heat could have offered Hayward essentially the same contract, but Hayward would have made more in Miami due to the different tax rates in Florida and Massachusetts. Of course, that would depend on where he had taken up residence.

Hayward agreed to a four-year deal with a total value of around $128 million. But according to Raiola’s calculations, Hayward’s “net” deal adds up to about $69.4 million after taxes are taken into consideration. Raiola said the same contract from Miami would have netted Hayward about $71.4 million.

If Hayward had stayed in Utah, he could have received a five-year maximum deal worth over $172 million. Raiola said that would have equated to about $91.3 million after taxes.

These types of comparisons aren’t uncommon.

Packard says he has a client who was choosing among three teams last year. Packard said a team from a state without an income tax offered his client the lowest salary, but it actually turned out to be the most lucrative deal once taxes were taken into account.

Packard says teams located in places without state income taxes use it as a leveraging tool and make players well aware of the advantages of signing there. In the NBA, that would include the Heat, Rockets, Orlando Magic, San Antonio Spurs, Dallas Mavericks and Memphis Grizzlies.

“When they’re pitching a player, they’ll say (that) we may be offering you less money, but they’ll kind of do their own calculations for the taxes and show that this is how you end up netting,” Packard said. “They know what other teams are pitching as well.”

Massachusetts has a 5.1 percent tax rate, whereas Florida doesn’t have a state income tax. But figuring out the difference in what Hayward would have made in Miami rather than Boston isn’t as simple as comparing those figures.

That’s because many states have a so-called “jock tax” that charges athletes visiting from other states to play games. For instance, Texas doesn’t have a state income tax, but members of the Mavericks, Rockets and Spurs are taxed for each day they spend practicing or playing road games in states that do have this tax.

Under that same rule, even if Hayward chooses to live somewhere other than Massachusetts, he’d be taxed by the state for each day he spends in Boston playing in a game, practicing or participating in some other team function.

So the difference in net pay an athlete might receive for choosing a team in a low-tax state over a team in a high-tax state isn’t as great as it might be if he were only being taxed in his home state.

These types of decisions must be made by free agents in all sports – not just basketball.

When defensive tackle Ndamukong Suh left the Detroit Lions for the Miami Dolphins in March 2015, he received $60 million in guaranteed money. Raiola said the difference in tax rates meant the Lions would have needed to offer him $65 million guaranteed just for the two contracts to have the same net value.

But tax rates are just one factor in a player’s decision.

“It’s all up to the player’s preference,” said Josh Horowitz, a co-founder of the sports and entertainment division at the WithumSmith+Brown accounting firm. “Maybe a player wants to live in New York and wants to live that lifestyle, so they’re willing to pay the extra tax, as compared to going to Miami or Texas.

“It depends on what they want to do. If they want to go chase a ring, they’ll go to Golden State right now and pay the higher tax to chase a ring. It all depends on what everyone’s preference is.”
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Aeneas Hunter
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PostPosted: Sat Jul 15, 2017 12:58 pm    Post subject:

That article has a number of errors. For example, a player for the Rockets does not pay a "jock tax" to Texas when he plays out of state. He pays taxes in the other state. We've had some other threads on the subject. The tax effect is real, but not as large as the article suggests.
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PostPosted: Mon Jul 17, 2017 7:46 am    Post subject:

As getting that max salary becomes less important due to the heights they're reaching, so does the impact of taxes. We're now seeing stars beginning to take sizeable drops to accommodate their teams because these drops are 35m to 25m and not 20m to 10m
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PostPosted: Mon Jul 17, 2017 5:42 pm    Post subject:

Who wants to live in California and Boston with all those taxes and high cost of living?
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